The Autumn Budget and Owner Managed Businesses - Entrepreneurs' Relief

In any budget predictions in recent years there have always been rumours around whether there would be changes to, or even the abolition of,…

Following on from our earlier article on the potential changes in next weeks budget to the taxation of contractors and consultants (IR35), we consider whether or not the budget may make changes to Entrepreneurs’ Relief. Any such changes could have a significant impact upon owner managed businesses across all sectors. 

In any budget predictions in recent years there have always been rumours around whether there would be changes to, or even the abolition of, Entrepreneurs’ Relief. Entrepreneurs' Relief, subject to certain conditions, provides a 10% rate of Capital Gains Tax for disposals by individuals of shares in trading companies or groups and disposals of business assets by those connected to a business after 1 year of ownership.

The relief is hugely popular amongst business owners but the reduction in recent years of capital gains tax rates from 40% to 20% for higher and additional rate taxpayers and 10% for basic rate taxpayers in relation to most assets) combined with the burgeoning costs of the relief (it is forecast to cost £2billion in 2016/17), means that changes may well be nigh.

HMRC have also recently commissioned research on the impact that Entrepreneurs’ Relief has on behaviours. The mere fact that such a research report has been commissioned indicates that there are some concerns and therefore that there are perhaps likely to be changes in the near future. The key uncertainty is around what form any such changes would take.

A reduction in the rate of relief seems unlikely given that there is now only a 10% differential between the 10% rate if Entrepreneurs’ Relief applies and the standard 20% CGT rate for higher and additional rate taxpayers if it does not. A reduction in the maximum amount of gains that qualify for relief (currently a lifetime limit of £10m) would also not materially influence behaviours unless the reduction was material, for example, to £1m. Change to the conditions required to claim the relief or the nature of assets that qualify for relief are perhaps more likely, but is likely to be driven by the outcome of the research that has been commissioned.

Given that the research has only recently been commissioned we do not anticipate any changes in this year’s budget, save perhaps some possible tinkering around the edges. It does appear that it is now only a matter of time before some substantive changes are made (or the relief is even entirely phased out or replaced). The irony is that this may result in some business owners deciding to accelerate their retirement or succession plans (demonstrating that any changes themselves to the relief are likely to affect behaviours).

Haydn Rogan is a tax specialist and a partner and can be contacted on +44 (0)161 214 0517 or email haydn.rogan@weightmans.com.

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